Educational Articles

Value Line has initiated coverage of Science Applications International Corporation, Inc. (SAIC) in its flagship product, The Value Line Investment Survey. The company is a leading provider of technical, engineering, and information technology services to the U.S. Government, namely, the Department of Defense.

Systems engineering and integration solutions are offered for large, complex government projects, while a broad range of higher-end, differentiated services are also sold to various government organizations. Specific capabilities include engineering and maintenance of ground and maritime systems, logistics, training and simulation, as well as operation and program support services. Further, its IT offerings include end-to-end enterprise information technology services that span the design, development, integration, deployment, management, and security of client infrastructure.

On August 30, 2012, the Board of Directors of Leidos Holdings, Inc. (LDOS) (formerly SAIC, Inc.) authorized management to pursue a plan to spin off its technical, engineering, and enterprise information technology (IT) services business into an independent, publicly traded company named Science Applications International Corporation (formerly SAIC Gemini, Inc.). Prior to February 1, 2013, these businesses comprised a majority of Leidos’ Defense Solutions Group and the IT portions of its Health, Energy, and Civil Solutions units. In accordance with a distribution agreement, on September 27 2013, LDOS completed the separation which took the form of a tax-free spin-off to Leidos’ stockholders of 100% of the shares of the SAIC’s common stock.

SAIC, Inc. faces a challenging operating environment. Indeed, competition for contracts is intense and it often squares off against a large number of established multinational corporations, which may have greater name recognition, better financial resources, and more employees. The company also competes against smaller, more specialized businesses. What’s more, the U.S. Government’s own capabilities and federal non-profit contract research centers tend to steal a piece of the pie as well. Thus, due to the diverse requirements of the federal government and its commercial customers, SAIC frequently collaborates with other companies to vie for sizable contracts, while bidding against these same peers in other situations.

Moreover, it should be noted that the U.S. Government has indicated it intends to increase industry competition for future procurement of products and services. This action will likely lead to fewer sole source awards and a greater emphasis on cost competitiveness and affordability. In addition, procurement initiatives to improve efficiency, refocus priorities, and enhance best practices could result in fewer new opportunities for the space as a whole, intensifying competition within the sector as businesses clamor for a limited set of new programs. All told, it appears SAIC, Inc. will probably face stiff opposition from a number of enormous multinationals, including The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), L-3 Communications (LLL), Raytheon Company (RTN), International Business Machines Corporation (IBM - Free IBM Stock Report), and Booz Allen Hamilton Inc. (BAH).

Although this stock has enjoyed a nice ride upward over the past couple months, in conjunction with the broader markets, many obstacles remain in place. A lengthy government project approvals process, federal budget uncertainties, and spending cuts could very well spell trouble for the top and bottom lines. Therefore, subscribers will likely want to exercise extra caution when evaluating equities within the government services sector.

All told, investors interested in this engineering and IT services provider are advised to consult Value Line’s quarterly reports for SAIC, Inc. as well as any supplemental reports and relevant articles as important news items arise.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.